Solicitors often talk about leaving property or money in trust for your loved ones when you die, but what does this mean and should you consider setting up a trust?
The perception is that trusts are for the wealthy, but that’s not necessarily true.
A trust is a legal way of managing the inheritance tax paid by your estate which deals with distributing your money, property and other possessions.
Inheritance tax is charged at 40% on the balance of your net worth over £325,000 when you die.
Other rules allow you to pass your estate without paying tax, such as to a spouse, civil partner or charity, for example.
Controlling your wealth after death
If a main home is passed to children, you can add another £125,000 to the nil rate IHT band, which rises to £150,000 from April 2020.
For couples the allowances are doubled if the nil rate bands remain unused when the first partner dies.
If you fear a significant IHT bill, then setting up a trust is a good way of paying less tax and passing more of your wealth to your family and loved ones.
Many wealthy individuals pass their estate in a trust to keep control over how their money and property is used.
Common reasons for setting up a trust include passing an estate to children under 18; passing shares in a business or when family disputes might arise, for instance when children are caught up in a divorce.
A trust involves three sets of people – the settlor, who leaves the assets to the trust; the trustees, who manage the assets for the settlor and the beneficiaries who receive a share of the assets.
Setting up a trust
To set up a trust, a lawyer should insert the correct wording into a will.
Providing the settlor lives for seven years after donating assets to the trust, no IHT is paid on their value when the settlor dies.
IHT is still paid by a trust –
- At 20% of the value of any asset
- 6% on any payments made or assets on every 10thanniversary from the date the trust was created
- 85% when assets are distributed to beneficiaries
IHT is due on the amounts above the nil rate band available in the tax year of the event.
For expats, professional estate planning advice is vital as some countries do not recognise the legal standing of a UK trust or tax treat the trust in different ways than those intended under British law.